Lenders speak their own language, and if you don't understand the terms, you could end up with a loan that costs far more than expected or doesn't fit your business needs. Whether you're exploring SBA loans, traditional bank financing, or alternative business lending, knowing key terminology puts you in control of negotiations and helps you compare offers fairly. This glossary breaks down the essential terms you'll encounter during the application and approval process.
Amortization and Repayment Terms
Amortization refers to the schedule by which you repay your loan over time through regular installments. Each payment covers both principal (the original amount borrowed) and interest (the lender's cost). SBA loans typically have amortization periods of 5–10 years for working capital and up to 25 years for real estate or equipment purchases.
Understanding your amortization schedule matters because a longer term means smaller monthly payments but higher total interest paid. For example, a $100,000 loan at 8% interest costs roughly $8,000 in interest over 5 years but $20,000 over 10 years. Ask lenders to provide a full amortization table so you can see exactly what you're paying each month.
Annual Percentage Rate (APR) vs. Interest Rate
The interest rate is the percentage of the principal charged annually. The APR includes the interest rate plus other costs like origination fees, closing costs, and insurance, expressed as a yearly percentage. This distinction matters: a loan with a 7% interest rate might have a 9.5% APR once all fees are factored in.
Always compare APR across lenders, not just the headline interest rate. This gives you an honest picture of what the loan actually costs.
Collateral and Security
Collateral is an asset you pledge to the lender as security if you default. For SBA loans, collateral might include business equipment, inventory, real estate, or personal guarantees from business owners. The lender can seize collateral to recover its losses if you stop making payments.
Unsecured loans don't require collateral but typically carry higher interest rates (often 10–25%+) to compensate for increased lender risk. Secured loans generally offer lower rates but put your assets at risk.
Debt Service Coverage Ratio (DSCR)
DSCR measures your business's ability to repay debt from cash flow. It's calculated by dividing your annual net income by your total annual debt payments. Most lenders require a DSCR of at least 1.25, meaning your business generates $1.25 in profit for every $1 of debt service.
If your DSCR is below 1.0, your business doesn't generate enough profit to cover loan payments—a major red flag for lenders. Check this ratio before applying to know whether you qualify.
Origination Fees and Closing Costs
Origination fees are upfront charges lenders assess to process your loan application. These typically range from 1–6% of the loan amount. SBA loans have capped fees: 3% for loans under $150,000 and 2.75% for loans $150,000 and above.
Closing costs include appraisals, title searches, legal fees, and documentation charges. Altogether, expect 2–5% of your loan amount in total fees and costs before you receive any funds.
Personal Guarantee
A personal guarantee makes you personally liable for the loan if your business can't repay it. If your LLC or corporation defaults, the lender can pursue your personal assets—bank accounts, home equity, retirement accounts—to satisfy the debt.
Most business loans require personal guarantees from all owners with 20%+ stake in the company. Understand this liability before signing.
Key Terms Checklist
- Prepayment penalties: Does paying off the loan early trigger fees?
- Balloon payments: Is a large lump sum due at the end of the loan term?
- Adjustable vs. fixed rates: Does your interest rate change, or stay locked in?
- Covenant requirements: Must you maintain minimum cash reserves or revenue targets?
When comparing loan offers, request terms in writing and have a business accountant or attorney review them. Mercoly helps you compare and find trusted Business Loans & SBA Lending providers in one place, so you can evaluate multiple offers side by side.
Frequently Asked Questions
Q: What's the difference between an SBA loan and a traditional bank loan? SBA loans are partially guaranteed by the government, allowing banks to approve riskier borrowers and offer longer terms and lower rates. Traditional bank loans require stronger credit and cash flow but typically have faster approval timelines.
Q: How much will an origination fee actually cost me? On a $250,000 SBA loan at the maximum 2.75% fee, you'd pay $6,875 upfront (often added to your loan balance). Always ask whether fees can be rolled into the loan amount or must be paid in cash.
Q: Can I negotiate loan terms with my lender? Interest rates and APRs have limited negotiation room based on market conditions and your creditworthiness, but you can often negotiate collateral requirements, prepayment penalties, and covenant terms—especially if you shop multiple lenders.
Compare loan offers from vetted lenders today to find the best terms for your business.